What is Life Insurance and How Does it Work?

Life insurance is designed to provide financial stability for your loved one in the event of your death. Think for a moment what would happen to your family if you passed away unexpectedly, would they be able to afford to pay the monthly bills? Life insurance is designed to provide financial relief for your family. Considering the grief and difficulties facing your family following your untimely death, leaving behind a smart life insurance policy is one of the kindest, most loving things you can do for them.

How Does Life Insurance Work?

When you purchase a life insurance policy, you agree to pay the insurance provider a monthly premium in exchange for a specific amount of insurance coverage that will be payable to your family when you pass away. Your loved ones have financial support when you die, reducing the burden on them to pay for the current lifestyle you have been living. There are multiple types of life insurance, so how do you choose the right one for your needs? It depends on several things, including the amount of coverage you will need for your loved ones to be financially okay, then it depends on how much you can afford to pay toward the insurance company monthly; lastly, your age and health will be taken into consideration to determine the coverage and cost.

Term Life Insurance vs. Whole Life Insurance

Term life insurance usually is the most affordable option and provides enough coverage for most people. Term life insurance will cover the term of your life. Whole life insurance will cover your entire life. With a whole life insurance policy, you will pay a part of the premium into investments. The problem with whole life insurance is the fact that most people pay more and obtain less. Whole life doesn’t provide as much coverage, and it can grow investments slowly, causing many people to waste money that could’ve been invested elsewhere.

With term life insurance, you will have a lower monthly premium, allowing you to save additional money that can be put towards other investments and lifestyle needs. When you start comparing life insurance policies, it is important to take a look at your life. As insurance companies review your application, they will consider the following:

  • Age

  • Gender

  • Smoking

  • Health history

  • Lifestyle risk - skydiving and other risky activities

  • Family medical history

  • Driving record

  • Occupation

How Much Coverage Do You Need?

When determining the right life insurance, you must consider how much coverage you truly need. Dave Ramsey and several investment experts recommend that your policy covers 10-12 times your annual income. For example, if you make $80,000 a year, you will want to obtain a life insurance policy of at least $800,000.

Term life insurance coverage needs to provide funeral costs, mortgage or rent, daily expenses, and any debts in your name. Life insurance payouts can be invested in mutual funds, allowing them to have income coverage for the rest of their lives with the right investment strategy.

Life Insurance Costs Vary By Risk

There is no set rate for life insurance; it all depends on the risk factors we listed above. Life insurance coverage will become more expensive with age, and if your health is starting to decline. Take time to evaluate the above risk factors so you can truthfully answer the questions. Most insurance companies will require physical examinations, and some can request additional information if they deem you as a “risk.”

Investing in your family is one of the most important things you can do. Take the time to obtain a life insurance policy, so your loved ones are not left behind in financial distress. Use our easy life insurance quote tool and find out much you qualify for and what you can afford.